Disagreements on the Market

2021 ◽  
pp. 15-37
Author(s):  
Hervé Crès ◽  
Mich Tvede
Keyword(s):  
Financial Markets ◽  
Market Failure ◽  
Monopolistic Competition ◽  
Market Equilibrium ◽  
Market Mechanism ◽  
Collective Decision Making ◽  
Publicly Traded ◽  
Production Externalities ◽  
Incomplete Financial Markets ◽  
Imperfectly Competitive

A general equilibrium model of publicly traded firms is provided in the case of a perfect market; it shows how, at the market equilibrium, shareholders agree that profits should be maximized, and about how to compute profits. Hence, they all agree on the objectives of the firms. Next three different contexts of market failure are introduced: incomplete financial markets, production externalities, and monopolistic competition. By use of a common tool (value vectors), it is shown how the market mechanism fails to generate full alignment between shareholders: when facing production externalities or monopolistic competition, shareholders do not necessarily agree that profit should be maximized; when facing incomplete financial markets, shareholders disagree on how to compute profits. In a nutshell: trading on the market generates agreement, but if trading is incomplete or imperfectly competitive then agreement is only partial, and the residual disagreements give rise to problems for collective decision-making.

Introduction

2021 ◽  
pp. 1-10
Author(s):  
Hervé Crès ◽  
Mich Tvede
Keyword(s):  
Decision Making ◽  
Market Mechanism ◽  
Collective Decision ◽  
The Political ◽  
Collective Decision Making ◽  
Market Failures ◽  
Publicly Traded ◽  
Majority Principle ◽  
The Social ◽  
Decentralized Market

The central puzzle of the book is introduced: Why is there so much consensus among shareholders of large firms? Although trading on the market forges agreement between shareholders about the firms’ objectives, residual yet substantial disagreement should persist because of market failures. To resolve the puzzle, a vision of the political economy of the (publicly traded) firm is outlined, showing 1) how the upstream operation of a decentralized market mechanism makes collective decision-making in the firm easier and more stable; and 2) why the democratic (majority) principle is likely to promote economic efficiency as a politically stable choice. Yet more is needed: a vision of the social economics of shareholders showing how collective decision-making shapes individual preferences in a way that promotes the alignment of shareholders. These two visions are laid out in the two parts of the book.

scholarly journals A capability framework for financial market regulation

2017 ◽  
Author(s):  
Rutger Claassen
Keyword(s):  
Financial Markets ◽  
Market Failure ◽  
Capability Approach ◽  
Martha Nussbaum ◽  
Market Regulation ◽  
Financial Market Regulation ◽  
Academic Literature ◽  
Regulation Of Financial Markets ◽  
Do So ◽  
The Capability Approach

This chapter is about normative justifications for regulating markets. In leading handbooks as well as in the academic literature, a split is often made between economic justifications (based on the theory of market failure) and social justifications (mainly around considerations of paternalism and distributive justice). The chapter questions this dichotomy and calls for the development of an ethically coherent framework for market regulation. To do so, the chapter proposes to build on the capability approach, first developed by economist Amartya Sen and philosopher Martha Nussbaum. A capability approach to regulation would hold that markets should be regulated to the extent necessary for realizing a set of basic capabilities. The chapter discusses existing applications to property law and contract law and extends them into the outlines of a general theory of regulation. The final part illustrates the promises of such an approach with respect to the regulation of financial markets.

scholarly journals The impact of the financial crisis on earnings management: Empirical evidence from Italian and Spanish listed companies

2019 ◽  
Vol 16 (2) ◽  
pp. 121-130 ◽  
Author(s):  
Francesco De Luca ◽  
Francesco Paolone
Keyword(s):  
Financial Crisis ◽  
Financial Markets ◽  
Performance Indicators ◽  
Listed Companies ◽  
Publicly Traded ◽  
Publicly Traded Companies ◽  
Time Period ◽  
Security Offerings ◽  
The Impact ◽  
Giving Bad News

Our study adopts a reliable and widely acknowledged model to detect accounts manipulation in order to assess the impact of the financial crisis on Italian and Spanish listed companies’ propensity to manage their earnings. The analysis is conducted on 565 publicly traded companies on the Italian and Spanish financial markets during the time period 2005-2013. We find a lower propensity to manipulate earnings in both countries during the pre-crisis period (2005-2008) as suggested by a decrease in the number of high-risk manipulators until 2008 included. With the spread of the financial crisis, companies become more manipulators. We believe that the reason for this is to avoid giving bad news to markets, investors, and lenders after that the crisis may have impacted too negatively on firms’ performance indicators and financial equilibrium. Our empirical results provide various implications for further studies related to managements’ incentives concurrently with security offerings.

Macroeconomic (in)stability and endogenous market structure with productive government expenditure

2017 ◽  
Vol 21 (2) ◽  
Author(s):  
Cheng-Wei Chang ◽  
Ching-Chong Lai
Keyword(s):  
Government Spending ◽  
Monopolistic Competition ◽  
Government Expenditure ◽  
Returns To Scale ◽  
Production Externalities ◽  
Congestion Effect ◽  
Local Indeterminacy ◽  
Endogenous Market Structure ◽  
Productive Government Spending ◽  
Productive Government Expenditure

AbstractWe consider the congestion effect of productive government spending in a monopolistic competition model with endogenous entry, and analyze the possibility of local indeterminacy. Some main findings emerge from the analysis. First, the indeterminacy condition is independent of the monopoly power. Second, productive government expenditure can be a source of local indeterminacy, while a higher degree of public goods congestion lessens the beneficial effect of productive government expenditure, and therefore reduces the possibility of indeterminacy. Third, a higher degree of internal returns to scale is associated with a lower possibility for the emergence of indeterminacy when production externalities are present.

Why So Much Consensus?

2021 ◽  
pp. 95-115
Author(s):  
Hervé Crès ◽  
Mich Tvede
Keyword(s):  
Decision Making ◽  
Market Failure ◽  
Holistic Approach ◽  
Individual Characteristics ◽  
Collective Decision ◽  
Collective Decision Making ◽  
Pareto Principle ◽  
Market Failures ◽  
Full Agreement ◽  
Clear Cut

An even more holistic approach to the problem is adopted by looking at how collective decision-making impacts the choices and characteristics of individual agents, e.g. their shareholdings, their beliefs about economic prospects, or even their preferences. The thesis is that individual characteristics shape collective choices and are at the same time shaped by them, forming a duality between persons and groups. The analysis is deployed on the network of affiliation of investors to firms. Indeed, suppose the Pareto principle holds at both the collective and individual levels, then a full agreement between all agents occurs within a cluster of investors and firms, despite potentially severe market failures—the ‘single thought’ theorem. Efficiency results from the endogeneity of individual characteristics, yet the theorem is strikingly strong and clear-cut. An analysis of what it takes for the Pareto principle to hold is proposed in each of the three contexts of market failure.

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